Getting Started
with Business-Critical Auctioning

An Introduction
To Online Auctions

A White Paper
by Moai Technologies

Getting Started
with Business-Critical Auctioning

Online auctions
have rapidly become one of the most successful forms of electronic commerce.
Implementing an online auction via an extranet allows companies to create a
new and effective sales channel: a virtual private marketplace. The combination
of administrative cost savings and higher revenues that result from the auction
format creates a compelling and rapid return on investment. Through automated
negotiations, online auctions allow companies to rapidly move inventory at true
market prices while maintaining brand identity and minimizing channel conflict.
To successfully take advantage of this type of system, a company must evaluate
a number of factors. First and foremost, the company must understand its market
and its customer. Once this review is complete, the appropriate software must
be selected and implemented. Finally, the deployed system needs to be marketed
to the customer group and introduced. This paper outlines these steps in more
detail and highlights the key considerations involved in each step.

Understanding
the Market and Customer

The first step to
successfully getting started with business-critical auctioning is to understand
the market and the customers that will be participating in the auction. Rather
than undertake a major analysis of existing customers, the company need only review
its understanding of its various customer types and their purchasing habits. Later,
the deployment of an online auction system will help the company gain a more thorough
understanding of the customer base, as information about their buying habits accumulates
in the auction system database. To determine the most effective approach in creating
an auction marketplace, the business unit developing the auction sales channel
must examine the following key factors:

 Amount
and type of inventory available

 Number
of trading partners participating

 Type of
customer participating

 Revenue
and inventory movement goals

Identifying the
amount and type of inventory to be sold is crucial in determining how to effectively
divide the items into separate auctions and categories, and how to best segment
the users into competitive groups of bidders. Companies often give large groups
of trading partners access to participate in specific auctions of discontinued
and obsolete items, while limiting auctions of refurbished and excess new products
to selected groups of bidders. Thus, companies are able to take advantage of
the competitive bidding dynamics of the auction, while minimizing channel conflict.

Figure 1. Trading Partners and Auction Visibility

Based on the customer
group, the auction can be tailored to best suit the customer's needs. Professional
users, such as brokers or inventory liquidators, require a real-time interface
and an efficient way to handle their portfolio of bids. Typically, these users
will be actively bidding until the closing of auctions. Users who are merely
interested in reduced prices or want to fill some inventory shortages will probably
be less active and take advantage of automated notifications and proxy bidding
features that allow them to minimize the amount of time spent in the auction.

Auctions can be
set up differently based on distinct objectives, such as maximizing revenue
or rapidly liquidating inventory. In general, auctions consisting of a limited
number of items and running for relatively long amounts of time will lead to
the highest revenues. Auctions consisting of larger lot sizes that are open
for shorter time periods allow large amounts of inventory to be efficiently
liquidated very rapidly. Different auction formats also impact the results of
an auction. A format such as the traditional ascending-price English auction
can be extended to run for as long as bidding activity continues, leading to
maximized revenues. A descending-price Dutch format can be used when it is desirable
to have the auction completed in a short time period.

In-House vs.
Out-Sourced Auction Service

A question that often
arises is whether to run an auction in-house or to use an out-sourced auction
service. Typically, companies that have to move large amounts or large dollar
volumes of inventory, will find it more cost-effective to run the auctions themselves,
while companies with small amounts of inventory often benefit more from an auction
service. Auction services are also a good outlet for companies that do not have
regular inventory management issues, but occasionally have goods to move via an
auction sales channel. Companies often find that the high commissions charged
by auction outsourcing services offset the increased revenues generated in the
auction, and ultimately lead to the same net results as selling through traditional
broker and liquidator channels. These companies choose to run their own auctions
to maximize the revenue gains. Also, companies often choose to restrict the auction
participants to existing trading partners by hosting the auction in-house to maintain
full control and avoid revealing proprietary customer lists to third parties.
Additionally, companies that want to use their auction as a way to better understand
their customers often run auctions in-house in order to have full access to the
data generated by the auction bidders. This data can be analyzed to determine
purchasing habits of customers, as well as to view trends occurring during the
auctions.

Software Selection
Criteria

A key element in
the success of the auction is making sure that the online auction software suits
the needs of the customer base without being an administrative burden for the
company. When evaluating auction software, there are a number of important factors
to consider that can ensure a higher degree of success in the online auction.
These include the following:

 Enterprise-level
architecture

 Features
of the auction application

 Flexibility
in customizing and integrating the software

 Resources
required to implement the system

Perhaps the most
important consideration when selecting a mission-critical piece of software
that will be used to interact with customers is that the underlying technical
architecture of the software is of enterprise-level caliber. Most enterprise-level
Internet applications employ a multi-tier architecture to minimize the potential
of performance bottlenecks within the system, while maintaining high levels
of flexibility. This type of architecture typically separates the application
into multiple layers to handle data management, business rules, and graphical
display of information. Each of these layers can be optimized by employing techniques,
such as caches and queue-based communication, which allow the system to handle
bursts of activity in the individual layers of the architecture without slowing
down the whole system. Bidding is not only the most complex process in the system,
but also the most crucial to log correctly in the database. Due to its complexity
and importance, bidding capacity of the application is a specific facet that
should be addressed in Internet auction systems. The application should employ
a queue-based system that allows large numbers of bids to be submitted during
periods of peak activity. It is also important to look at how many bids can
be completely processed in a given time period. Complete processing of a bid
involves accepting the bid, processing it, and logging the transaction completely
in the database. The number of bids that can be processed in a given time period
is crucial to the success of an online auction.

Ideally, the architecture
should interact with industry standard relational databases and contain a published
database schema, which allows for easy sharing of data with other applications
and facilitates analysis of the auction data. The architecture should also include
open APIs that allow the software to be integrated with other in-house applications
such as inventory management, order processing, and accounting packages. An
additional advantage to a well-designed, extensible, and open architecture is
that this type of software is much easier to modify with the latest auction
formats and enhancements.

Most commercial
auction applications will share a common set of basic features. However, if
the customer base consists of a large number of professional users that use
inventory auctions as a key procurement method within their businesses, it is
crucial that the software meets their specialized needs. Those needs include
real-time updating capabilities and portfolio screens that facilitate easy management
of bids in multiple, simultaneous auctions.

Security is another
key consideration in any Internet-commerce application. Online auction systems
must allow for communications to be encrypted using
industry
standard SSL with strong encryption, such as RSA. A flexible security model
for assigning user rights is also important. Auction software should let
the
administrator set security for individual users and groups, allowing different
levels of access to the system. This includes setting security that allows
users
and groups access to specific sets of auctions within the system. This type
of security model allows an administrator to develop highly focused groups
of
auctions and users. This focus helps eliminate channel conflict and allows
for effective targeted marketing of the auctions.

Flexibility is
always a key consideration in auction software. The user interface of the system
should be easy to customize and brand with the company's identity, without limiting
the flexibility in designing the look and feel of the system. The auction formats
themselves should be based on a set of parameters that the administrator can
easily modify, including the conditions upon which the auction will close.

An important final
consideration in selecting auction software is the amount of resources required
to deploy, customize, and maintain the auction system. Hardware and network
resources required for an auction system vary based on the volume of activity
on the system, but many companies will find a mid-range server and T1 network
connectivity sufficient for their needs. Personnel resources should also be
minimal, as the auction system should be highly automated. Standard installation
requires an IT resource for a day or so to install the database and auction
server. As these products typically have wizard-based installation programs,
experienced personnel are usually not required. System customization will take
approximately the same amount of resources as is required to design a web site,
which will vary based on the sophistication of the site.

Figure 2. Required Resources

The technical expertise required should not go beyond the ability to write HTML
pages. However, if one utilizes the APIs to integrate the auction software with
existing legacy systems, more experienced technical resources will be required
in customizing auction software. Ideally, the software should be fully functional
without requiring that type of integration. Finally, the ongoing auction system
administration should be as simple and automated as possible. Administration
tools should allow clerks to easily enter inventory data into the auction based
upon business rules put in place by the business unit managing the movement
of the inventory.

Implementing
an Online Auction System

Once the appropriate
auction software has been selected, it is important to make sure that the software
will smoothly integrate with existing business processes. This integration process
can be performed either internally or using an outside integration firm. Deploying
an auction system is similar to integrating any enterprise application. One must
define the resources, procedures, and interfaces required to accommodate the new
system. The data flows must be understood and any new programs or processes must
be designed, implemented, and tested. The effort required is dependent mainly
on the level of customization and automation required to support the auction system.
A high-level work plan for implementing an auction system includes the following
steps:

 Identify
and train resources

 Install
and configure the software

 Design
and implement the web site

 Design
and implement supporting interfaces

 Test the
system

While there are
some basic dependencies between these steps, many of the details can be carried
out simultaneously.

As with any enterprise
application, it is necessary to have internal resources that can administer
the auction software. Ideally, the software will contain an easy to use graphical
administration tool. Administration should take minimal effort and minimal training,
allowing existing personnel to be quickly trained on the product. Most auction
software requires three primary roles: a system administrator to install and
configure the software, a data administrator to maintain the data in the auction
system, and content administrator to customize the templates in order to provide
the look and feel of the auction site. None of these roles should be full-time,
and, in many cases, the same person can perform more than one role. The important
aspect of this step is to identify the resources and ensure they have the proper
training.

Online auction
software should support a wide range of platforms and databases so that the
software conforms to the existing standards in the organization. This will eliminate
the need to adopt new standards and technologies to support the auction system,
as well as reduce the amount of training required to implement the system.

The next step
is designing the look and feel of the site. This process is often led by the
business unit responsible for the inventory and may involve the company's marketing
group and/or web group. Companies will often contract the overall look and feel
to a design company. By using standard design templates, the content administrator
can easily add the auction data. The most flexible auction systems support an
HTML pass-through template architecture rather than rigid structured template
design. This allows for the highest degree of customization and branding.

While the software
is being installed and the web site is being developed, the organization should
focus on data flows required for the new system. It is important to understand
how inventory items and customers will flow into the auction system. It is also
important to understand how orders for items will be fed back to existing systems
for organizations that wish to integrate the auction system with existing systems.
A true enterprise-level system will allow the data flows to be handled in several
ways. Depending on the level of automation required, the system should allow
manual processes or automated processes. The more sophisticated auction systems
will allow automation either through access to the system's database or through
an open API. Once the data flows are understood, the organization can define
the manual processes or implement the automated processes and integrate them
into the existing environment.

Figure 3: Auction
System Architecture

Once the site
design has been approved and initial customizations made, a small group of users
should be consulted to gauge the design's visual effectiveness, the level of
user friendliness, and general usability. Following this initial approval testing,
there is typically a round of final user interface approval by the business
unit deploying the system and the marketing group. After the design is approved,
the functionality of the site should be tested internally to make sure everything
is functioning correctly. All aspects of the system should be tested including
the manual and automated processes. Each component of the workflow, from inventory
entry to fulfillment, should be thoroughly tested. All reports created to analyze
the system bidding patterns and trends should also be run and examined for suitability
of use at this time. The system should also be tested under expected peak user
loads and data volumes.

After internal
testing is complete, a small favored group of customers can be selected to participate
in a pilot test of the online auction site. This often consists of the top 10%
of a company's trading partners, who are given exclusive access to the initial
auctions. The pilot test is often a user-acceptance test. Comments from this
user group will help determine final modifications to the site's navigation,
content, and usability.

Marketing and
Rolling out the Online Auction

After the system
has been successfully beta tested, it is time to publicly market the site. This
is usually done by sending out initial emails with account information, such as
user IDs and passwords, to the full group of trading partners that will participate
in the auctions. Creating a special event or promotion is instrumental in driving
widespread participation in the initial auctions. This can be done by using the
auction as an exclusive distribution channel for certain types of sought after
inventory, or perhaps by giving some premium for participation in the auction.
Once the initial marketing push has been made, it is advisable to create regular
auction schedules that allow people to make the auction a regular part of their
business practices. Auction software should also have automated email systems
that allow for notifications without ongoing marketing costs. It is crucial that
the auction software allows for analysis of the bidding patterns and trends within
the auctions, as this data can be utilized to make subsequent auctions more effective.
As the auction becomes more successful, additional marketing and promotion is
often useful to increase the size of the trading group. For example, while only
registered trading partners may participate in an auction, a company can open
up the auction for additional partners to view. This can entice them into a new
level of association with your company. The automated software allows for efficient
communication with large groups of partners, thus ensuring the company achieves
its goals.

When the system
has been fully tested and an initial marketing program executed, it is time
to go live with the site to the entire customer group. From that point on, the
most critical factor is the ease of ongoing administration. It is important
to make sure the software includes simple administration tools that allow new
auctions to be easily added to the system on a continual basis.

Conclusion

Online auctions present
a new web-based channel for companies that have excess inventory and asset management
challenges. A virtual private marketplace offers forward thinking companies many
compelling business advantages, including:

 A rapid
return on investment

 Maximized
revenues through competitive bidding

 Creation
of a bidding history database for use in one-to-one marketing

 Minimized
sales channel conflict

 Preservation
and strengthening of the company brand

 Reduction
in administrative costs

Careful consideration
should also be given to the criteria for evaluating online auction software.
Among these are the enterprise-level architecture, the flexibility of the system,
the 'must-have' features in the auction application, and the resource commitment
required to administer and maintain the system.

Developing the
right online auction system that is customized for a company's needs and customer
base will create a powerful sales channel with a rapid return on investment.
By taking into consideration each of the steps documented in this paper, companies
can create a truly successful online auction environment.

For more information
on online auctions, call Moai Technologies at (415) 625-0601.